Recap: Industry Structure Analysis

Advanced Competitive Strategy

IIMS PGP Term IV (2021-22)

Instructor: Prarthan B. Desai

Slide# 1
Why Industry Structure?

• Industry structure determines long term profitability of a business,

allows effective strategy formulation by assessing threats and
opportunities in the business environment

Slide# 2
Industry Level Value Chain

Potential New
Entrants

Business Channel
Suppliers Customers
Firms Partners

Substitutes

Slide# 3
Industry Structure: Porter’s Five Forces

Threat of New
Entrants

Bargaining Rivalry among Bargaining

Power of Existing Power of
Suppliers Competitors Buyers

Threat of
Substitutes

Slide# 4
Threat of Entry
• New entrants bring new capacity and desire to gain market share, thus intensify
competition

• Barriers to entry
– Economies of scale
– Network effects
– Customer switching costs (learning new specifications, procedures)
– Capital requirements
– Incumbent advantage independent of size (proprietary technology, access to resources,
subsidies, locations, learning from experience)
– Unequal access to distribution channels
– Restrictive government policies (license requirements, patent protection, foreign
investment barriers, limits on access to local raw material sources)

– Expectations of reaction by competitors (history, resources, price cuts, slow industry

growth)

Slide# 5
Bargaining Power of Suppliers
• Suppliers can squeeze profitability by raising prices, shifting costs downstream,
limiting quality or services

• Suppliers are powerful when

– High concentration (few numbers)
– High switching costs for incumbent industry players (difficult to switch suppliers)
– Suppliers offer differentiated products (patents)
– Suppliers offer credible threat of forward integration
– Suppliers have low dependence on the industry

Slide# 6
Bargaining Power of Buyers/Customers
• Buyers/Customers can exert power by forcing down prices, demanding higher
quality or service (and thus drive up costs), play competitors against each other

• Buyers include end costumers/consumers, as well as channel partners

• Buyers/Customers are powerful when

– They are concentrated (few buyers) or buy in large volumes (particularly in an industry
having heavy fixed costs)
– Industry’s products are standard or undifferentiated
– Low switching costs (buyers can easily switch industry players as their suppliers)
– Buyers offer credible threat of backward integration
– Buyers are highly price sensitive

Slide# 7
Bargaining Power of Buyers/Customers…
• Buyers/Customers are price sensitive when
– Products represent significant fraction of their cost or expenditures
– They (buyers) are not very profitable
– Quality of buyers’ products are not affected significantly

• Applicable to Industrial buyers as well as consumers

• Applicable to channel partners

– Additional factor: channels are more powerful than upstream manufacturers when they
influence purchasing decisions of downstream customers

Slide# 8
The Threat of Substitutes
• A substitute performs the same or a similar function by a different means (plastic
and aluminum, email and express mail)

• Substitutes limit industry profitability by placing a ceiling on prices

• Often difficult to foresee

Slide# 9
Rivalry among Existing Competitors
• Rivalry can take many forms: price discounting, new-product introductions,
advertising campaigns, service escalation

• Price is the most destructive basis of competition. It occurs when

– Low differentiation or switching costs (Airline industry)
– High fixed costs, low marginal costs (basic materials such as paper and aluminum)
– Expansion of capacity in large increments (certain chemicals such as chloride)
– Highly perishable products or services (airline seats)

Slide# 10
Rivalry among Existing Competitors…
• Intensity of competition is greatest when
– Numerous competitors with equal size
– Slow industry growth
– High exit barriers

Slide# 11
Implications for Strategy
• Understanding economics of a business and competitive landscape

• Positioning the company in the competitive landscape

• Exploiting change in the competitive landscape

• Shaping the competitive landscape structure

Slide# 12
Implications for Strategy…
• However, the five-force analysis only helps in understanding average profitability
of an industry. It does not explain why a specific firm in an industry performs better
or worse than other firms in the industry.

• In order to understand the relative performance of a specific firm in an industry,

we need to look at the business-level strategy of the firm, and compare it with the
business-level strategies of its competitors.

• For a business strategy, industry analysis may be useful in assessing external

consistency of firm-level value chain choices

• For a corporate strategy, industry analysis may be useful in assessing entry and
exit decisions

Slide# 13